The number of lenders that offer interest only mortgages is relatively small compared to other loan programs but the good news is that these lenders have more flexibility in setting loan terms and many may permit cash out refinances.
Interest only loans were popular prior to the real estate market collapse but became less common due to regulatory changes and other industry developments. Over the past several years, however, interest only mortgages have made a comeback and more lenders are offering them.
The table below shows interest only mortgage rates and fees for lenders in your area. Not all interest only lenders offer cash out refinances but many do. We recommend that you contact multiple lenders to determine program availability and to compare loan terms. Shopping interest only lenders is the best way to save money on your loan.
Please note that the qualification requirements for an interest only cash out refinance may be more challenging than for other mortgages. For example, lenders may apply a maximum loan-to-value (LTV) ratio of 70% to 75% as compared to an LTV ratio of 80% for a standard cash out refinance of a single unit property. Using a lower LTV ratio limits your mortgage amount and means you are required to have more equity in the property to qualify for the loan.
Interest only lenders may also require a higher borrower credit score to qualify for the mortgage as compared to standard loan programs. You may also be required to hold financial reserves at closing, on top of your closing costs, which increases your financial commitment.
Additionally, because lenders have more flexibility in determining the qualification requirements for an interest mortgage, applicants with stronger financial and credit profiles may be better positioned to qualify. For example, applicants with high credit scores, low debt-to-income ratios and significant financial resources such as savings or investments are more likely to get approved and receive more favorable mortgage terms such as a lower interest rate or higher LTV ratio.
Review How an Interest Only Mortgage Works
Although interest only mortgages offer multiple advantages such as a lower initial monthly payment and more flexibility to pay down principal on your schedule, you should also consider the significant risks including potential payment shock. The mortgage rate and monthly payment for an interest only loan can increase significantly when the mortgage starts to amortize, which can create significant financial challenges if you are not prepared for the higher payment.
Finally, as referenced above, fewer lenders offer interest only mortgages so it may be challenging to find a lender that offers the program. You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by location and loan program. For example, you can find top-rated lenders in your state that offer interest only loans.
"Interest-Only Mortgage Payments and Payment-Option ARMs." FDIC. Federal Deposit Insurance Corporation, October 31 2006. Web.« Return to Q&A Home About the author